Reasons for British recession

Free essay example:

Everything points to recession

A recession is a decline in a country’s GDP (gross domestic product) or negative real growth for two or more successive quarters. It is usually caused by many factors that individually are small problems but combined cause a much larger issue that affects the whole economy.

High street retail sales slump- retail sales at Christmas 2007 didn’t increase by the expected amount. Experts predicted a slow month but they didn’t realise how slow it would be, they only increased by 0.3% over last Christmas’ sales. In comparison the sales increase at Christmas 2007 increased by 2.3% and in 2006 it was 2.6%. Growth of sales has slowed because of the lack of consumer confidence and high interest rates. Next Christmas’ sales are expected to fall further as households have yet to feel the effect of the latest bank of England interest rate increases. Manufacturers and retailers are calling for a rate cut so they can afford to stay in business. Internet shopping has also affected high street sales. More and more people are using the internet for their Christmas shopping as it is convenient, there’s a greater variety of items and prices are much lower.

Pound at record low against Euro- the pound has fallen to an all time low against the Euro at about 76p to the Euro. The pound is expected to fall further through 2008 as the UK economy slows, investors are now moving out of high yielding currencies and into low yielding currencies like yen. A weaker pound would make the UK more competitive on world markets but it could also raise the cost of imported goods and goods purchased by British people abroad could be more expensive. The problem is that the drop in value of the pound won’t have an immediate effect on the UK’s economic growth and manufacturing; this will force the Bank of England to make further rate cuts throughout 2008 weakening the pound further.

UK property price crash- House prices in the UK are at their most overvalued for 15 years and home owners are finding it hard to pay their mortgages. A combination of a record tax burden, rising household bills and a predicted increase in interest rates is making the property market look more expensive than ever. Affordability of property has decreased by 3% in the last nine months and by almost 20% in the last four years. Affordability decreases when prices rise faster than earnings, an expected rise in interest rate from 1% to over 6% in the next 18 months is also making it harder to buy into property. This also has an effect on mortgages as the average homebuyer is borrowing 6 ½ times their salary when purchasing a new home. Both investment banks like Morgan Stanley and consultants like Price Waterhouse Coopers are predicting a severe drop in house prices in the next few years. Prices have risen sharply over the last few decades and when families couldn’t afford to buy a new home there were fears that there could soon be a steep price fall with knock-on effects for the rest of the economy. First time buyers in the near future however will still not be able to afford a new house very easily as prices are not set to fall for a while yet.

Shares in huge fall- recently the FTSE 100 has seen it’s biggest ever one day points fall as the fears of a recession in the US led to panic selling across the world. Stock markets have seen their biggest fall since the terrorist attacks of 9/11. The FTSE 100 fell by 5.5pc to 5578.2 and the FTSE 250 which focuses more on the UK fell by 4.3pc to 9260.6. The worldwide fall began after President Bush’s rescue of the US economy failed to convince investors when it was revealed. All developed countries experience negative effects from the US economy slowing down, but countries with fast economic growth like China and India may be able to sustain the global economy.

Rising Repossessions- home repossession will become more common in the UK if the interest rates keep rising. For an average two person household mortgage repayments take up 22% of take-home pay. Low interest rates made bigger loans more attractive to home buyers and banks were happy to lend the money. Property repossessions have been quite low recently because they have been affordable but with interest rates set to rise home repossessions will become more common as people cannot afford to pay back their loans.

More bankruptcies- in total 15 796 people petitioned for bankruptcy between April and June this year this is a 10% increase on the number in the same period last year. The number of creditors petitioning fell but the number of debtors increased by 20%. This is linked to interest rate rises as theses are forcing people into bankruptcy and this is bad for lending companies too as these people aren’t paying back the money they owe so companies are losing out.

Soaring fuel prices- UK natural gas prices have risen sharply as supply troubles have forced the national grid to issue a warning to industrial users to cut down on their usage of natural gas. The wholesale price of gas has quadrupled to as much as 255 pence per therm because of supply fears. Gas supplies are short at the moment because the main storage facility is closed and the recent cold weather has caused domestic usage of gas to rise. If the situation worsens industrial users of natural gas could have their supplies cut off. Many industrial users have back up gas supplies or alterative ways of generating energy such as oil and they have had to switch to these because of high gas prices. However some chemical firms that use gas as a raw material have no choice but to pay the high prices or cut down on production. Another cause of rising fuel prices is the fuel duty that Gordon Brown has introduced. This was meant to pay for transport improvements but has just been used for general public spending rather than being specially put aside for transport spending. The price of fuel has risen by 2p under the pretence of being used for this transport fund.

Higher inflation- inflation has risen in recent years but it has remained unchanged over the past few months. It has held at 2.1% over the past three months and the biggest inflationary pressure was from continually rising food prices. The Retail Price Index inflation measurement dropped from 4.3% to 4% last November and this takes into account mortgage payments. The biggest factor in reducing inflation was household energy bills which had risen by less than the year before. This could change in coming months however because energy supplier Npower announced that it was going to raise it’s energy bill costs and the expectation is that other energy suppliers will follow suit.

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